Determining the “TRUE COST” of Low Income Customers

1. Determining the “TRUE COST” ofLow Income Customers Stephen D. ColtonLenhardt & Colton, LLC1775 Magnolia Ln N Minneapolis, MN 55441Ph (612) 550-0687 *** Fax (612) 550-0776scai@skypoint.com

2. Workshop Objective Demonstrate How One UsesActivity Based Costing to Determine the “True Cost” of Serving Low Income Customers

3. Definition • “True Cost” means there is a direct causal link between costs incurred and our cost objective, the Low Income Customer market segment.

4. Today’s Agenda • Why Do We Need to Know the True Cost of Serving Low Income Customers? • Why Turn to “Activity Based Costing”? • Structuring an ABC Project • Analyzing the Data • Using Activity Based Data for Continuous Improvement.

5. Why Do We Need to Know? • The Public Policy Question:“How Big is the Aggregate Need?” • The Question for an Individual Utility:“How Do We Live Within the Subsidy?”

6. How Big is the Aggregate Need? $1,000,000? $20,000,000? $500,000,000?

7. Living Within the Subsidy Low Income Customer Payments+Low Income Assistance Cost of Providing Service to Low Income Customers In a Competitive Marketplace, the Difference Comes Out of Profit!

8. Today’s Agenda • Why Do We Need to Know the True Cost of Serving Low Income Customers? • Why Turn to “Activity Based Costing”? • Structuring an ABC Project • Analyzing the Data • Using Activity Based Data for Continuous Improvement.

9. Traditional Data Tells Us What???

10. Activity Based Data Reveals Causes Cause of Costs • Normal Credit & Collections Activities - Qty of Credit & Collections “Actions” - Current Credit & Collections Process •High Arrearages at End of Winter

11. External Customers Internal Customers The Process Model Resources Consumed People Costs $$$ Supplies $$$ Deprec $$$ Inputs Outputs Suppliers Activities

12. Hierarchy of “Process Terms” Business Process Initiate New Customer Service Activity 1. Setup New Account 2. Connect new service 3. Issue first billing Review Application Run Credit Report Tasks Assign Customer Number Perform Data Entry Send Confirmation Activity Output Confirmation Letter

13. Today’s Agenda • Why Do We Need to Know the True Cost of Serving Low Income Customers? • Why Turn to “Activity Based Costing”? • Structuring an ABC Project • Analyzing the Data • Using Activity Based Data for Continuous Improvement.

14. 2. Trace Costs to Activities 5. Calc Cost per Output 1. Identify Activities 4. Collect Demand for Outputs 6. Calc Market Segment Cost 3. Identify Outputs Steps of the ABC Process

15. Step 1: Define Activities Workshops Interviews

16. Produce & Deliver Goods & Services Understand Markets & Customers Develop Vision & Strategy Design Goods & Services Market & Sell Goods & Services Invoice & Service Customer The APQC Business Process Model Operating Processes Management & Support Processes Develop & Manage Human Resources Manage Information Manage Financial & Physical Resources Execute Environmental Management Program Manage External Relations Manage Improvement & Change

17. Activities That “Make a Difference” Produce & Deliver Goods & Services Understand Markets & Customers Develop Vision & Strategy Design Goods & Services Market & Sell Goods & Services Invoice & Service Customer Credit Activities Collections Activities

18. Example of Collections Activities Collections Activities • Answer Customer Inquiries • Resolve Billing Errors • Apply Customer Pmts • Negotiate Deferred Payment Plans • Disconnect Customer Service • Attend Staff Meetings

19. Step 2: Trace Costs to Activities

20. Step 3: Identify Outputs

21. Step 4: Collect Demand for Outputs • • Projected Aggregate Annual Demand for each Activity’s Output • • Projected or Actual Demand for each Activity’s Output by Market Segment

22. Aggregate Annual Demand

23. Output Demand by Market Segment

24. Step 5: Calculate Cost per Output

25. Step 6: Calculate Market Segment Cost

26. Today’s Agenda • Why Do We Need to Know the True Cost of Serving Low Income Customers? • Why Turn to “Activity Based Costing”? • Structuring an ABC Project • Analyzing the Data • Using Activity Based Data for Continuous Improvement.

27. Analyzing the Data • • Total Cost of the Low Income Market Segment • • Differential Cost of the Low Income Segment • • Normalizing the Data • - Cost/Sales Ratio • - Cost/Customer Ratio • - A Caution

28. Today’s Agenda • Why Do We Need to Know the True Cost of Serving Low Income Customers? • Why Turn to “Activity Based Costing”? • Structuring an ABC Project • Analyzing the Data • Using Activity Based Data for Continuous Improvement.

29. Strategies for Continuous Improvement • 1. Reduce Costs of Value Added Activities using Root Cause Analysis • 2. Reduce the Frequency of Non-Value Added Activities

30. Applying These Strategies Strategy #1 Largest dollar Value Added Activity. Use Root Cause Analysis to identify the Cost Drivers and reduce them, improving the Cost per Output. Strategy #2 A Non-Value Added Activity. Reduce the number of Non-Value Added Outputs by reducing the “demand” for those outputs.